There are many risks involved in building a home, which is why parties involved have insurance policies in place. However, problems that arise due to the way a house was constructed might not show themselves immediately, which as a case recently heard by the Ontario Superior Court of Justice demonstrates, can cause a headache for contractors.
A dream house quickly flooded
The homeowners hired a contractor to build their dream house in Vaughan. The home too two years to build, and was completed in September 2009. They moved in on November 1 of that same year. Nine days later, a faucet on the main floor became detached. The resulting flood caused over $3,000,000 in damage.
The homeowners made a claim under their homeowner’s policy. The insurer initiated a subrogation action against the City of Vaughn, a subcontractor, and the plumbing contractor (“the contractor”). A subrogation action is one in which an insurance party to pursue damages relating to an insurance loss caused by a third party. In this case, the insurer wanted to collect the money it paid the homeowners from the defendants.
The City of Vaughn and the subcontractor settled, but the contractor brought a motion for summary judgment, taking the position that it was entitled to coverage under a builder’s risk policy, and because that policy included a waiver of subrogation, thus leading to their conclusion that the claim was barred.
The insurance policies
The contractor had a Commercial Multi-Peril Policy in place during the construction of the house. It included both Residential Builders – All Risks Insurance policy (“RBAR policy”) and Residential Contractor’s General Liability Insurance policy (“CGL policy”). Both policies are occurrence-based, though the definition of “occurrence” is different in each policy.
“Occurrence” is defined in the RBAR policy as”
“… any one loss, casualty or disaster or series of losses, casualties or disasters, arising out of one event. If the inception of the event causing the loss occurs prior to the estimated completion date of the project, then the Insurer shall be liable for any loss incurred after the estimated completion date of the project, as a result of the event.”
In the CGL policy, “occurrence” is defined as:
“…an accident, including continuous or repeated exposure to substantially the same harmful conditions.”
The RBAR policy was in place during the build, specifically from July 12, 2007 to September 1, 2009. It was the primary insurance for the project. It also provided that “All contractors and/or subcontractors are added as Additional Insured.” It insured “property of every kind and description used or to be used in, or incidental to, construction, installation, erection, dismantling, demolition, reconstruction or repair, owned by the insured.” As stated earlier, it also included a waiver of subrogation.
The faucet was installed on the main floor of the house sometime between June and August 2009. It was on November 9, 2009 that an extension tube that connected the faucet to the water line broke, causing the flood. The RBAR policy had been expired by that time, but an engineer hired by the contracted was of the opinion that the components of the faucet began to be stressed shortly after installation, affecting the water seal’s resistance to pressure. He called this “creep/stress relaxation” and said it was what led to the failure of the faucet.
The positions of the parties
The contractor leaned on the RBAR, which covered any “occurrence during the coverage period so long as ““the inception of the event causing the loss occurs prior to the estimated completion date of the project.” They claimed the “inception” of the incident was the creep/stress relaxation that began during the coverage period. Since the inception occurred during the coverage period, the home owners were obliged to make a claim under the RBAR, not their home insurance. Following that logic, it was the contractor’s position that the insurer was barred in making a claim against the contractor because the RBAR did not allow for subrogation.
The insurer’s position was that the “occurrence” was the actual separation, which of course occurred after the RBAR coverage expired. They also argued that the subrogation issue was not relevant to the trial because no claim was made under the RBAR.
The court’s analysis
The court determined that the primary issue is whether the “occurrence” of the loss took place during the RBAR period. If it did not, the contractor’s motion would fail, and no other issues would have to be discussed.
The plaintiff referred to a 2012 case (“Meridian”) from the Nova Scotia Court of Appeal which defined an “occurrence” as:
“an accident, including continuous or repeated exposure to substantially the same harmful conditions. Property damage that results in a loss of use of tangible property that is not physically injured is “deemed to occur at the time of the occurrence that caused it.”
However, while the court acknowledged that the Meridian definition is common, and is similar to that in the CGL policy, the term “accident” did not appear in the RBAR policy, nor is there any mention of “continuous and repeated exposure” to any harmful conditions “arising out of one event.”
The court determined the “event” in question was the detachment of the faucet from the water supply. It was not, as the contractor argued, the improper installation of the plumbing. The court went on to draw a distinction between “inception” and “cause.” The decision stated the inception of an event is the beginning of the event, not the cause of it. As such, an event cannot cause itself. Turning to the builder’s risk policy, the court wrote that the purpose of such a policy is to provide coverage during construction of a project.
The court held that the loss was not an “occurrence” within the meaning of the definition of the RBAR policy, and as such, the contractor was not insured under that policy, meaning the insurer was not barred in making a subrogation claim.
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